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Contributed by Darren Lai, Partner (Head of Chambers - Litigation), Richard Wee Chambers
On 5th August 2020, the Bar Council of Malaysia and the Climate Governance Malaysia (“CGM”) jointly organised a webinar on the “Directors' Duties & Climate Change”.
The live-recording can be accessed here.
The webinar was conducted in conjunction with the launch of the second edition of CGI’s ‘Primer on Climate Change: Director’s Duties and Disclosure Obligations’. It also serves as a follow-up on developments since the initial first webinar and the first Primer in 2021. The Primer serves as a succinct and accessible summary for non-lawyers to readily understand and act on their legal obligations in a fully-informed manner.
The webinar highlights the position of directors sandwiched between contractual obligations with investors and stakeholders, and the growing sophisticated expectations of directors in this brave new world of climate reality.
Datin Seri Sunita Rajakumar co-founder of CGM, in her introductory remarks, brought to attention the urgent calls by the United Nations World Meteorological Organisation that earth has a 50% chance in facing a 1.5 degrees increase in global warming in the upcoming years, an indicator that climate change is rapidly being harmful for people and the entire planet , which is a call for immediate action.
The ASEAN Institutions of Directors Network (IoD), launched in February 2022, is presently seeing an increase of directors and businesses recognising the need for sustainable products being the main emitters of greenhouse gases contributing directly and indirectly to environmental changes. If this does not happen, it is likely that no one will want to invest in businesses, lend money or even to buy the products nor work with us.
This was followed by welcoming remarks by the President of the Malaysian Bar, Miss Karen Cheah, who made her opening with the recent Netherlands court ruling which compelled Shell Group to take responsibility over its own carbon dioxide emissions and cut down emissions by 45% as compared to 2019. The historic lawsuit is noteworthy as it was the first time a company was legally obligated to align its internal policies with that of the Paris Climate Agreement.
Miss Karen acknowledged that in Malaysia, the Environmental Quality Act 1974 and the Wildlife Conservations Act 2010 are among existing laws governing environmental issues in our country, however, these legislations are criminal-action oriented as opposed to civil issues. Public interest groups struggle to initiate public interest litigation due to civil procedures being unfavourable to environmental claims, difficulties in establishing locus standi and huge amounts of money required to fund these cases.
Roger Chan, Chairperson of Bar Council Environment and Climate Change Committee, had also addressed the urgency of the matter in his welcoming remarks, recognising the contributors and panellists of this webinar who had tirelessly contributed to the Primer and bringing awareness to the subject.
Updates on Directors’ Duties
The webinar began with a legal update by Miss To’ Puan Janet Loo, senior partner, Head of Environmental Practice and Co-Head of the ESG Practice Group at Skrine.
To’ Puan Janet Looi, in her presentation, started off with recent climate reports and updates on Malaysia’s international commitments which entails (1) an updated Nationally Determined Contributions (“NDC”) in August 2021 with Malaysia pledging to reduce its economy-wide carbon intensity of 45% in 2030, an increase of 10% from its 2015 commitment; (2) an expanded GHG coverage to seven gases; (3) Malaysia signing the Glasgow Leaders’ Declaration on Forests and Land Use to significantly increase sustainable forest management in the UN Climate Change Conference (COP26); (4) Malaysia commitment to reduce global methane emissions across all sectors by at least 30% by the year 2030.
To’ Puan Janet then touched on Section 213 of the Companies Act, which lays down director’s duties to act for a proper purpose in good faith for the best interest of a company and the duty to exercise reasonable care, skill and diligence. In Petra Perdana case,[1] the apex court held that both an objective test and a subjective test are applicable in relation to this legislation.
Referencing her jointly-written legal opinion published in the Commonwealth Climate and Law Initiative (“CCLI”) (here), Janet states that it is abundantly clear that directors are duty-bound to proactively and urgently apprise themselves of all aspects of climate change that may affect their companies.
Business Judgement Rule
To’ Puan Janet then delved into the business judgement rule under Section 214 Companies Act. This rule refers to any decision on whether or not to take an action in respect of a matter of relevance to the business to the standards of “an honest and intelligent man” in the Petra Perdana case.
For a better understanding, she presented examples where a director is said to have met the requirements in making a business judgement, pursuant to S213(2) Companies Act 2016, if he/she;
a) makes the business judgement for a proper purpose and in good faith;
b) does not have a material personal interest in the subject matter;
c) Is appropriately informed about the subject matter of the business judgement; and
d) Is in the best interest of the company.
Panel Discussion
Karina Litvack, co-founder and governing board chair of Climate Governance Initiative (“CGI”) began by sharing the basis for which the CGI and its local chapters exist is to answer a clear need in which directors have expressed growth from the CCLI. It is in answer to the deep-seated view by the majority of investors that Karina has met who felt that they were prevented from making significant change for fear of harming their businesses’ competitive edge in the midst of pervasive regulatory uncertainty, what's the director to do?
Acknowledging that on one hand, a director has to ensure good business on the table, and on the other, risk of legal suits for failure to account to climate risk, Karina suggests turning the tables by looking at powerful, compelling reasons to act. Karina herself was suddenly parachuted into an oil and gas company by institutional investors who wanted to spark a change in the company. As an expert in the Oil and Gas industry, Karina, who seeks changes believes that directors have the power and responsibility to spark the transformations needed. With that, the Primer enables them to comply and not go beyond the law.
To’ Puan Janet Looi,[2] when asked on what issues in Malaysia surprised her, stated that it was the disconnect between the regulators and the ability of the legal infrastructure to drive change, outlining policies and yet we do not see the steps.
Sarah Barker, partner at MinterEllison, Melbourne, shared her thoughts on creating a more efficient co-development space for the government and private agencies. As a big believer of the power of the market to drive efficiency, she believes it to be the missing piece. Both directors and lawyers alike have been looking for rules and regulations as if seeking permission and seeing it as something compliance-based. However, Sarah opines we should look up and out to see things differently as now, even the capital markets and real economy have started to move in unison with the regulators.
“Climate change is not a compliance issue, it's a risk issue.” - Sarah
Due to the vague rules of climate change compliance, how can a lawyer trained to comply by the rules transition to be a lawyer who can adopt climate risk? Sarah proffers that a compliance-based lawyer requires a shift in mindset. Although she is actually a corporate lawyer, she realises that climate change poses a real financial risk issue. Thus, there must be room for interest of directors as it concerns vital financial matters. Admittedly the laws surrounding climate change are broad, normative, and radically dynamic, hence, lawyers need to account for interdisciplinary factors beyond mere environmental discipline - connect the dots between climate risks to finance, insurance, corporate governance and the various commercial disciplines.
“Compliance is the bare minimum. Governance is important as well.” - Janet
Karina further illustrates that in the oil and gas sector, directors are getting strong signals to increase production and supply which runs counter to the climate goals a company ought to establish that is to bring production down to 45% by 2030 to reach zero target by 2050. Thus, to exercise best judgement, directors must resolve to juggle these different drivers to make difficult short-term adjustments to avoid risk of stranding. For example, avoiding a long-term contract to commit to the climate issue today.
Karina reiterates that it is now a very real part of a director’s job to rethink on how to reposition themselves in the next 30 years. Some businesses may decide to withdraw if there is simply no viable business model in the future while others would shrink their business in a cost-effective way and re-deploy assets in a new direction. For example, refineries can be revamped as there is not much of a difference between petroleum refining and bio-refining.
As for Karina and her company, the old-fashioned oil drilling would be replaced with other businesses apart from fossil fuels. Hence, what is left of its fossil fuel ‘reserves’ would be used to make profits funnelled into greener businesses which by the way are very cash-hungry and needs capital to growth.
“In the boardroom, it's our job (as directors) to dig into each of these different business models” - Karina
Questions posed and addressed
Q: In Malaysia, 90-95% businesses are driven by small-medium enterprises (“SMEs”), where unlike the larger corporations, the costs of addressing climate change concerns may not be affordable. This may pose an obstacle to achieving the overall target. How can this be addressed?
Sarah, in answer, opines that it is universal for companies of any size that the core functions of a directors relates to strategy and risk oversight and that the fact remains that the future looks nothing like the past. While SMEs may not have the same resources, directors of SMEs still need to adopt a qualitative perspective (over a quantitative one), to see what these changes in technology, policy and stakeholder preferences means to one’s business. One may need to obtain expert advice on this.
Q: Does the law impose strict compliance on all types of companies, by way of care and due diligence in terms of fiduciary duties, considering that, in all fairness, ESG is broad and there is no standard Malaysian ESG.
Janet, in answer, said that all types of companies, small or big, should be sustainable in the long term. At the end of the day, it is more of a risk question than a compliance question.
Sarah, implores directors to ask the right questions, that is ‘if all I ever do is presume that business will continue as usual, am I satisfying my director’s duties?”
Q: As ESG is not yet law, how will the Companies Act be enforced? As not all listed companies are able to comply and publish an IR report, much less, smaller business.
Janet, in answer, states that as the Companies Act encompasses director’s duties and ESG, hence, it is very much part of the legal duty of directors.
Sarah and Karina, in support, gave an example that whilst the Companies Act does not cover Covid-19, it is an incontrovertible truth irrespective of a business’ size and fault, it affects all. Hence, directors must think of resilience and repositioning to dodge the worst effects of climate change, protecting workers, supply chains, physical assets and customers.
Q: Non-executive directors and members of the board play an oversight role and is not involved in the day-to-day management of a company. To actualize the climate risk agenda, is there a need for an ESG compliance risk officer or function formally set up within a company’s chart.
Janet, in answer, states that whilst it is encouraged to have a committee, non-executive directors share the important role of ensuring compliance because they are equally exposed to the risk of liability and are equally affected.
As a whole, Malaysia is heading towards the right direction as Malaysia is a full signatory of the Climate Governanceinitiative, a leading global forum for Climate Changes and that what we need now is increased education and dissemination of information regarding environmental issues to all directors and companies, extending to smaller businesses as well. One may take heed towards Karina prompts for legal counsels in advising directors to switch from a mentality of fear of infuriating shareholders due to lower short term returns to a mentality that accepts risk-taking as part of the job. In fact, failing to do so would entail being negligent in the directorship post.